Rent Levels and Home Values

Orion’s brokers hear plenty of nightmare rent stories. In many areas where Orion lends, rents are rising faster than home values, or faster than incomes. But nationwide home values rose almost 7% over the past year to a Zillow Home Value Index and rents only rose 1.5 percent over the past year to a Zillow Rent Index. Will rent increases slow down even more? 

When rents rise at a faster clip, Orion’s brokers say it's likely many renters will pursue homeownership as a means of stabilizing their monthly housing costs. Thanks to low mortgage interest rates and home values holding strong, the monthly costs associated with a mortgage were not only more stable than rents, but much lower for many. 

Slower rental increases may take some of the heat off those renters thinking of buying a home just to escape the volatility of steep annual rent hikes. Most will choose to transition into homeownership eventually. But if they feel like they have a bit more time to save, it could lead to a small softening in demand, enough to potentially take some of the frenzy out of the market. And this softening in demand, however slight, could lead to slower home value growth – and as home value growth slows, those homeowners waiting to sell until they could extract maximum profit from their home might be more tempted to begin doing so. 

Flattening rents could also lead developers to re-focus their attention away from multi-family projects and back toward more single-family and for-sale development, which will help ease supply constraints. 

Finally, the prospect of rising mortgage interest rates and still-growing home values will likely erode some of the affordability advantages of owning a home versus renting. Rising mortgage rates and continued home value appreciation won't entirely erase the financial advantages of owning over renting, but Orion’s brokers know the gap can be expected to narrow. No one has a crystal ball, but we remind our brokers that even when the data seems unrelated, the housing market is interconnected and complex and very few things happen in a vacuum.

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